A Stop Placement Idea -CORRECTION

** There was an error in the original post as denoted below **

Friday saw another downtrending day on the cash S&P500 index. On a trading basis …. Note that; at least for one day, we held identified support in the 1276.5 to 1284.5 cluster zone by closing above the lower end of the target. As such we must continue to be on guard for a price reversal.

In my last post I mentioned “tightened” stops on any short position. This means different things to different people. One way to identify stop placement (and there are hundreds I am sure) is via the Reaction – Trend System invented by Welles Wilder. As an example, the stop going into Friday’s session would have been 1305.24 and was not hit. For Monday the stop would be lowered to 1287.89. This would not be a stop and reverse. I would only take a long position only taken on a break of 1320.15 (NOT 1351.11 as originally posted) (this is where today’s resistance line falls). Any long would have an immediate trailing stop at the lower of the last three lows (including Monday’s low).

On a forecasting basis …. I am still sticking to the idea that the March low will hold in the S&P500. In my timing work this implies that a significant rally is at hand – with a minimum target of 1440 (the May 9 high) - but first we need to see a reversal on the daily chart. One step at a time.

Lessons Learned

As previously stated this blog documents my attempt to improve my knowledge and application of technical knowledge to the cash S&P500 index. Yesterday provided a good day for “Lessons Learned”.

1) Never take action based on a daily RSI/Composite Index signal if the higher time frame is on an opposite signal. This indicator flashed a “buy” signal at the close Wednesday. As mentioned here just last Sunday the weekly chart is on a “sell”.

2) Do not attempt to use “real-time” Elliott Wave counts. Darn. I LOVE Elliott Wave, but I can’t continue to fool myself any longer. It is too impractical to use on a real-time basis. Nothing works better in hindsight but the counts morph too easily in daily application.

So stick to what works and keep it simple. In my Sunday, June 22 posting I wrote: Daily Chart: Bearish with an immediate target near the 1292 level. I should have stuck with that like glue instead of becoming mostly sidetracked by the technical culprits just mentioned. But how was this target derived and is it still valid? Those are the concepts I want to stick to and explore further in this blog. Hence today’s chart.

The first concept is the market environment. Bullish or bearish? We are bearish since we are below the latest Support line (shown in bright green sloping upward) and will stay that way until we “decisively” break the Resistance line (shown in dark red sloping downwards).

Once a Support/Resistance line is broken we can calculate price targets. For the down move from May 19 the targets are shown as the blue ellipse (symmetry target), horizontal blue lines (Fibonacci targets), horizontal purple lines (magnets) and horizontal orange lines (Gann). Clustering of targets is important. Notice we are in a cluster of 1276.5 to 1284.5 now.

Once a price target is reached we must determine if the market is likely to reverse. Is the market in an area of “price exhaustion”? If so stops should be tightened. Here is where the RSI can come in handy as one tool to spot areas of likely reversals. In a bearish environment (as defined by the RSI itself) price exhaustion is indicated below the 32 level. We are now there – for the first time since the May 19 top. My conclusion? Stops should be tightened here on open shorts and a long position only taken on a break of 1329.13.

Building a Bottom?

Thursday saw an “uptrending” day on the cash S&P500. The Candlestick was a “white opening Marubozu” which; by itself, has a bullish indication. Furthermore, yesterday’s candle can also be interpreted as a “Gravestone” and has a bullish interpretation when found in a downtrend; more so since it follows some spinning tops.

The candles are buoyed this morning by a technical “buy” signal that was flashed at the close yesterday when both the RSI and Composite Index turned up with bullish divergence now in place between the two indicators (see chart). So does all of this mean that the low is in? No. It means that the chances of a low here have increased. If the low isn’t in I think it will be made above 1285.

What would convince me more that the bottom is in (and that the impulse pattern from May 19 is complete) would be a positive breaking of the downtrend line drawn on today’s chart. Hard to see is the short moving average which is now overlaying that downtrend line. Add a Fibonacci grid and you have a lot of resistance at 1335-37 today.

I suspect the cash S&P500 will have to “back and fill” for a few sessions before much upside progress is made. Finally, let’s play a “what if” scenario. What if the low is in? I think the bounce will be over by July 15 but at least would reach for the 1370 level. I will worry about more precise targets once I have a better feel that the low is in.

Still Watching for Proof of a Reversal

Yesterday the cash S&P500 made an “outside” day. Such a formation following an “inside” day is known by Jeffrey Kennedy at Elliott Wave International as a “Popgun” pattern. It indicates that an impulse wave may be dead ahead. In the current case it implies that we may be staring at a reversal to the upside.

Although the technicals would be supportive of a reversal here; and an apparent Impulse pattern is near completion from the May 19 high, I want to see more proof. Why should I be definitive when the market itself is indecisive? We have had two spinning top candlesticks in a row now – indicators of indecision and a potential reversal. Potential being the key word.

One final reason to hesitate on becoming a bull here: Since the move down from May 19 is five waves we know that at least one more five wave pattern to the downside awaits after any corrective bounce.

An "inside" Day Reveals Little

Yesterday the cash S&P500 made an “inside” day. This indecisive day was not the proof I need that a short-term low is in.

I am expecting a “b” wave corrective pattern from the May 19 high and it appears that the first portion of that pattern, a’, is an impulse pattern. Thus, even after it completes and the market bounces we know that at least one more five wave pattern to the downside awaits. Now is not the time for bullishness.

Overview

Let me stand back for a bit and review the price action from last autumn’s high. As shown on the attached chart, I believe the move down into January 23 was an “a-b-c” Elliott Wave “Flat” pattern. That was followed by an “Expanded Flat” pattern from the January low into the May 19 high. This Flat is most likely the “a” wave of another corrective pattern. This implies that the price move from May 19, 2008 will be corrective: a “b” wave pattern. That “b” wave will be composed of at least three legs; a’, b’ and c’. I believe that a’ is on the verge of completing now.

Here is a quick recap of my technical analysis, the bedrock of which is that the March 2008 low will not be broken until after Labor Day.

Quarterly Chart: Bullish – supporting the interpretation that the 1256.98 level will hold in the near-term.

Monthly Chart: Bearish. Technical “sell” signal generated on the November 30, 2007 close.

Weekly Chart: Bearish. Technical “sell” signal generated on the May 23, 2008 close.

Daily Chart: Bearish with an immediate target near the 1292 level.

Although I am expecting a short-term low here I will wait for proof.